The current stock market, measured by the Dow Jones
Industrial Average, bears certain resemblances in form
to the 1966 - 1981 market. During that period, the Dow made five
attempts to rally past 1,000 and failed each time:

Year

DJIA High

1966

983

1969

985

1973

1020

1977

1005

1981

1004

The low point during this 15-year period came in
late 1974 at 607.87. This marked the end of a 21-month slide that
lopped 40% off the Dow and 50% off the S&P 500, making it the worst
bear market since the Great Depression. The decline took place against
the backdrop of a larger malaise that seemed to
engulf the entire world, politically, socially and economically:
The unpopular and ultimately futile Vietnam war was in full swing;
the Yom Kippur War of '73 disrupted the Middle East and precipitated
the '73-74 oil shock; oil and gasoline prices quadrupled in price
and fed the fire of general inflation in commodities; interest rates
rose; the country was in recession and suffering from widespread
social unrest. Finally, Watergate grew from a seemingly minor incident
into a full-blown Constitutional crisis that reached to the highest
echelons of American power and ended in the resignation and disgrace
of Richard Nixon. It was not until a full eight years later - 1982
- that the Dow was finally able to push decisively through 1,000
and sustain an 18 year bull market to an all time high of 11,750
in March, 2000.

Looking back at the events of 1973-74, it is striking how similar
they are to events unfolding today. Since the Dow's Y2K peak, it
has dipped as low as 7,400 and made several attempts to break back
through 11,000 but has failed each time, with the most recent attempt
being earlier this month. In Iraq, the United States is once again
involved in an expensive foreign war of dubious origin, questioned
merit and waning popularity. Oil prices have risen seven-fold, from
a low near $10 a barrel in 1999 to highs near $70 today, and are
threatening to move higher on renewed Middle East tensions. Some
have even compared the
Fed's recent decision to stop publishing M3 statistics to Nixon's
closing of the gold window in 1971, which resulted in massive
inflation that persisted throughout the 1970s.

Finally, a number of high-level political scandals are brewing that
have the potential to reach to the highest echelons of power and
once again test the powers of the President before the Supreme Court.

Background: 1970s Politics & Economics

In June 1971 with the Dow hovering around 900, the New York Times
and Washington Post began publishing secret Defense Department documents
pertaining to the Vietnam War, known as the Pentagon Papers. The
documents, leaked to the papers by Daniel Ellsberg, a former defense
analyst, revealed dramatic government deception and incompetence
in the Vietnam War. President Nixon, incensed at their publication
and citing national security, sued in Federal court to
stop their publication. His lawsuit managed to temporarily muzzle
the press until the U.S. Supreme Court ruled 6-3 in favor of the
First Amendment, and publication was allowed to continue. In
response to the leak, Nixon initiated the White House "plumbers"
unit - so named for their orders to plug leaks in the Administration.
The unit burglarized Ellsberg's psychiatrist's office in
order to dig up "dirt" and discredit the man, and the plumbers later
went on to infamy in their attempted "third rate burglary" and bugging
of the Democratic National Committee at the Watergate Hotel that
would ultimately cost Nixon the Presidency.

In spite of the publication of the Pentagon Papers, and the Administration's
response, Nixon was reelected President in November 1972 in one
of the largest landslides ever. No connection between the
Watergate break-in and the President had yet been made. By
early January 1973, the Dow rose to a new all time high of 1,020.20.
To borrow a colloquialism from the time, everything was looking
pretty "groovy" on the surface.

However, from its lofty zenith above 1,000, the Dow began to decline,
signaling trouble ahead for the economy and the President. The advance/decline
line had already long gone negative. The dollar, after being "decoupled"
from gold by Nixon in '71, continued to fade. Gold and the price
of oil were on the rise. Over time, connections between the Watergate
affair and the President were made and political and economic uncertainty
began to undermine investor confidence, driving the stock market
down relentlessly for the next 21 months.

January 30, 1973 - Former Nixon
aides G. Gordon Liddy and James W. McCord Jr. are convicted of
conspiracy, burglary and wiretapping in the Watergate incident.
Five other men plead guilty; mysteries remain [Original
Washington Post article]

April 30, 1973 - Nixon's top
White House staffers, H.R. Haldeman and John Ehrlichman, and Attorney
General Richard Kleindienst resign over the Watergate scandal.
White House counsel John Dean is fired [Original
Washington Post article]

October 10, 1973 - Vice President
Spiro Agnew resigns in a scandal unrelated to Watergate. He pleads
no contest to a criminal charge of tax evasion and accepting bribes
during his tenure as governor of Maryland [More]

October 20, 1973 - The
Saturday Night Massacre: Attorney General Richardson
and Deputy Attorney General Ruckelshaus resign rather than carry
out Nixon's orders to fire Special Prosecutor Archibald Cox. Robert
Bork carries out Nixon's orders to fire Cox and abolish the office
of Special Prosecutor. Upon learning of his firing, Cox released
a direct statement: "Whether ours shall continue to be a government
of laws and not of men is now for Congress and ultimately the
American people." Pressure for impeachment mounts in Congress
[Original
Washington Post article]

July 27, 1974 - House Judiciary
Committee passes the first of three articles of impeachment, charging
obstruction of justice

August 8, 1974 - Richard Nixon becomes the first
U.S. President to resign. New Vice President Gerald Ford assumes
the Presidency, only to later pardon Nixon of all charges related
to the Watergate case [Original
Washington Post article]

And it wasn't just politics - there was also
big trouble in the Middle East:

B) October 16 - 19, 1973 - Saudi Arabia, Iran,
Iraq, Abu Dhabi, Kuwait, and Qatar unilaterally raise oil
prices by 17 percent to $3.65 a barrel and announce production
cuts; Oct. 17 - OPEC's Arab oil ministers agree
to use "the oil weapon" to punish the West for
its support of Israel in the Arab-Israeli war. They recommend an
embargo against unfriendly states and mandate a cut in exports;
Oct. 19 - Saudi Arabia, Libya and other
Arab states proclaim a total ban on oil exports to the United States.Gasoline prices quadruple from twenty-five cents
per gallon to over one dollar.

C ) March 17, 1974 - Oil embargo is ended

As you inspect the chart above, note that there was no single "A-ha!"
moment in which the market suddenly collapsed. The character of
the decline was slow, grinding, and relentless - almost like a market
in denial of where it was inevitably going. The market even staged
a 15% rally on the Middle East tensions and Yom Kippur War, and
did not make its final bottom until 3 months after Nixon's resignation.

On the other hand, the gold market continued its bull market that
began when Nixon "closed the gold window"(in other words, declared the nation insolvent) in 1971, when gold was
officially priced at $35 per ounce. Aside from some healthy corrections,
it was a bull market for gold, not only through '73-74, but throughout
the entire 1970s.

During this period, the US dollar was extremely volatile.
On balance, the dollar's fall during the 1970's was a mirror image
of gold's rise. I have included longer-term charts of gold and the
US dollar for further reflection, with the '73-74 period highlighted.
If you have any insights you would like to share, please
post them here.

Reflecting rising inflation, interest rates also rose. The Prime
Rate is shown above. After turning down from its peak in '74 at
12%, it ultimately went on to hit 20% in 1980!

Back to the Future

Now flash forward to 2003. On July 6, 2003, the New York Times published
an op-ed essay by Joseph Wilson, a former US Foreign Service diplomat,
titled "What
I didn't find in Africa." In the piece, Wilson accused the Bush
Administration of manipulating intelligence and exaggerating the
Iraqi threat in order to justify the war, which had already begun.

Like the Nixon Administration 32 years prior, this administration
was outraged, and looked for ways to discredit the source of the
information. Conservative columnist Robert Novak was enlisted,
and noted
in his column of July 14, 2003: "Wilson never worked for the
CIA, but his wife, Valerie Plame, is an Agency operative on weapons
of mass destruction. Two senior administration officials told me
Wilson's wife suggested sending him to Niger to investigate the
[claims that Iraq was attempting to purchase materials for a nuclear
bomb]." These two sentences, which illegally revealed the name of
CIA operative Valerie Plame, led to the appointment of Patrick
Fitzgerald as Special Counsel to find out just who those "two
senior officials" were.

As a result of Fitzgerald's investigation,
Vice President Dick Cheney's top advisor and Chief of Staff "Scooter"
Libby was indicted on perjury and obstruction of justice charges
in late 2005 and forced to resign. Whether Libby was the
source of the information or not is still unclear. Fitzgerald has
accused him of lying (perjury) about his role, but the mystery remains
as to whether he was trying to protect himself or someone else,
perhaps his boss, Dick Cheney, or perhaps his boss's boss, President
Bush. The investigation continues, with Fitzgerald now focusing
on the role of Karl Rove, President Bush's top advisor and primary
political "architect". As with Watergate, it is possible
that the investigation could lead beyond executive advisors, directly
to the Executives themselves. While Washington (and the market)
seems to have forgotten about the investigation, new indictments
could come at any time.

Like 32 years prior, the American people missed the larger picture
contained in the news. Few understood the relevance of Wilson's
claims, Novak's revelation, and the investigation of it all by a
special prosecutor. The real story was not the leak, but the manipulation
of information as a justification for war. Nevertheless, Bush was
reelected President in 2004, untouched by the seemingly insignificant
scandal.

Watergate, like the current affair, was a complicated story and
no one immediately understood connections between the "third rate
burglary" at the Watergate Hotel and the President of the United
States himself. Nixon was most certainly banking on the public not
making the connection and ultimately losing interest in the story.
It was only through the hard work and diligence of Archibald Cox,
a Harvard Professor who was appointed as special prosecutor in the
Watergate investigation that the crimes of the Nixon Administration
came to light. As Cox got closer to the truth, Nixon got nervous
and wanted him gone.

On October 20, 1973 in one of the most surreal moments in American
political history, Nixon ordered Cox fired, and the office of special prosecutor
abolished. Rather than comply with this order, both Attorney General
Elliot Richardson and Deputy Attorney General William Ruckelshaus
resigned. Nixon found a willing subject in Robert Bork, who ultimately
carried out his order.

Chaos had broken out at the top levels of the US Government. For
some perspective on what a bizarre series of events it was, imagine
Bush firing White House Counsel Harriet Miers only to have her
turn around and finger Bush for the crimes he had committed. Then imagine Bush
attempting to fire independent counsel Patrick Fitzgerald, only
to have Attorney General Alberto Gonzales and Assistant Attorney
General Alice Fisher refuse to carry out his orders and instead
resign in protest! Imagine that Dick Cheney had just resigned in
disgrace 10 days earlier, and that the Arab world is at war and
cutting off oil supplies to the West. It must have seemed like the
world was coming apart at the seams, and it is no wonder that the
market was falling. It is a wonder that it didn't fall further.

Upon learning that he had been relieved of his duties, special prosecutor
Archibald Cox released a simple, direct statement: "Whether ours
shall continue to be a government of laws and not of men is now
for Congress and ultimately the American people."

A Government of Laws and Not of Men

Cox's statement is one that Congress and the American people will
likely once again be pondering in the coming months and years. On February
6, the Senate will begin hearings on the President's secret
domestic spying program, which was just recently revealed by
the New York Times. Like with Watergate, no one knows where the
investigation will lead, or what other sorts of unsavory details
could be revealed as a result.

At the root of the issue is President Bush's decision to wiretap
hundreds, possibly thousands of Americans in violation of the Foreign
Intelligence Surveillance Act (FISA). Bush has argued, in effect,
that as Commander in Chief, he has the right to override the nation's
laws. Ironically, FISA was enacted in 1978 in reaction to
Watergate, to prevent the widespread abuses in domestic surveillance
that were practiced by President Nixon. Like Bush, Nixon also ordered
wiretaps to be conducted without warrants - in his case, of conversations
between journalists and White House staffers. Like Bush, Nixon claimed
the wiretaps were done for national security purposes. Just as Bush
believes his warrantless wiretaps are justified by the 9/11 attacks,
Nixon claimed his illegal wiretaps were justified by the Vietnam
War. War can be a very convenient political tool for a
president. However, Nixon's illegal wiretaps were among the factors
that led to the articles of impeachment. Coincidentally (or perhaps
not), two figures that were central to Nixon's administration -
Dick Cheney and Donald Rumsfeld - are also central figures in this
administration.

Recently, Bush Administration officials have complained that in
spite of the great numbers the economy is generating, the economy's
performance isn't getting a lot of media attention. Maybe that's
because, as in '73-74, Americans don't feel so great with the threat
of inflation, war, global warming, recession, and high crimes in
the White House - that old malaise - hanging over our collective
heads. Or maybe it's because people simply don't believe the words
and numbers that the government puts out any longer. In spite of
the fact that government statistics say inflation is low, the price
of heating one's home, filling one's gas tank and shopping at the
grocery store are at record highs. Health insurance, college tuition,
housing - the list of things that have never been more expensive
goes on and on. Or maybe it's because the economy is actually on
the verge of a recession.

Like in '73, the Middle East situation is once again coming to the
fore, this time with Iran's nuclear ambitions and her proposed oil
bourse as the center of attention. Like in '73 gold is on the
rise, and the dollar on the retreat due to the uncertainty and waning
confidence in the US. Just like in '73, the American public is growing
skeptical of the President, and after enough free passes, it appears
that we're finally starting to ask tough questions. Zogby reports
that a majority of Americans want to see Bush
impeached if he broke the law. The American Civil Liberties
Union has already
filed a lawsuit against the NSA to stop the secret spying, and
is aggressively campaigning for the appointment of a special counsel,
saying, "When President Bush secretly authorized the National Security
Agency to spy on Americans, he violated the law, the Constitution
and his oath of office."

This is not intended to be a polemic against Bush or the current
Administration. I simply want to emphasize the seriousness of the
charges that the Administration is facing, and the effects on investor
confidence of a long, messy investigation. With events similar to
'73-74 unfolding in the political and economic arenas, it would
not be a surprise to likewise see a collapse in the stock market,
and similar behavior in the other markets discussed above.

Robert
Prechter, in his book Socionomics:
The Science of History and Social Prediction, has pointed out
that periods of waxing social mood (such as we have seen from 1982
- 2000) bring about feelings of confidence, optimism and ebullience
which are reflected in the stock market as well as in our cultural
heroes. The opposite is also true. Waning social moods (such as
1966 - 1981, and 2000 - ?) are marked by feelings of pessimism,
doubt, and uncertainty that also are reflected in a declining stock
market, declining social standards and our treatment of cultural
figures, including our political leaders. Just look at how history
remembers Johnson, Nixon, Ford and Carter - the American Presidents
from 1966 - 1981.

It looks like that old malaise is back again. Like in the Nixon
Era, Bush's political fortunes and the stock market are likely to
be intimately tied. Watch the news carefully and plan your investment
strategy accordingly.

* * *

An Invitation

I was five years old in '73. One of my earliest memories is sitting
next to my dad as he peered into a little black and white television
set, listening to the Watergate hearings. I remember two of the
correspondents' names - Terry Drinkwater and Roger Mudd - funny
names perfectly constructed, it seems in retrospect, for a five
year old to remember. But what do you remember? It is surreal to
read about the events today - it must have seemed like the end of
the world, in some respect. An ex-hippie told me about being at
an anti-Vietnam War protest in DC where 500,000 people were trying
to levitate the Pentagon - and were certain they could do it! So
what was it like? The politics? The inflation? How does it compare
to today? How do you see the current situation shaking out? Let
us know - please
post your comments to my blog.